- (% GDP) 1.00-841.52 A7,5 GDP Gr. (%), Fin. Open., Trade Open. (% GDP) Credit (% GDP) Gr. (%) 0.01-1052.44 A8,5 GDP Gr. (%), Fin. Open., Trade Open. (% GDP) Credit (% GDP) Gr. (%) Fin. Open. : Trade Open.
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- 21See, for instance, Gali and Gertler (2007).
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- 23See, for instance, Coe and McDermott (1997), Clark and McCracken (2006), Deniz et al. (2016), Gross and Semmler (2017), and Jasova et al. (2019).
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- 25McLeay and Tenreyro (2019) and Hooper et al. (2019) provided reviews on the apparent flattening of the Phillips curve in the 2000s, and especially since the financial crisis recession. These studies focus on the U.S. 26See Stock and Watson (2019).
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- 27See Cukierman (1992), Campillo and Miron (1997), Aisen and Veiga (2008), CalderoÌn and Schmidt-Hebbel (2010).
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- 29See, among others, Grilli et al. (1991), Cukierman (1992), Alesina and Summers (1993), Loungani and Sheets (1997), Panagiotidis and Triampella (2006).
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- 30See, among others, Posen (1995), Eijffinger and de Haan (1996), Fuhrer (1997), Campillo and Miron (1997), King and Ma (2001), Hayo and Hefeker (2002), Klomp and de Haan (2010). 48 Several possible reasons why a robust negative relation of independence with inflation is wanting have been proposed.
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- 32See Lustenberger and Rossi (2020) for possible differences between legal independence measures and the turnover rate.
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- 35See Truman (2003), Hyvonen (2004), Vega and Winkelried (2005), among others. 50 Its apparent success in the period of global disinflation, when inflation experienced a reversion toward the mean, seems to be sample-dependent.
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- 37See, for example, Montiel (1989) and Bruno and Fischer (1990).
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- 41This is the main message from the Fiscal Insurance Theory of debt management. See Missale (1997) and Missale (2012).
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- 44See Romer (1993), Lane (1997), Campillo and Miron (1997), Loungani and Swagel (2003).
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- 45See Mankiw (1987), Poterba and Rotemberg (1990), Grilli et al. (1991). 53 to inflate, while the larger share held by foreigners would increase it. Similarly, Hilscher et al. (2014) estimated that higher inflation would unlikely lower the real value of U.S. debt significantly. The reasons are expectations of modest inflation and short maturities of publicly held debt. The conclusion that arises is that the interaction between financial repression and long maturities of debt allows for significant effects of inflation.
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- 47By contrast, central bank independence turns out to be unimportant in developed and developing countries. Campillo and Miron (1997) concluded that it is mainly structural factorsâopenness, political stability, and tax policyâand not institutional characteristics of an economy, particularly the degree of central bank independence and exchange rate arrangements, that drive differences in inflation across countries.
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- 48However, Romer (1993) argues that this would likely yield biased estimates because changes in openness within countries are caused by changes in trade policy and other macroeconomic factors that could also affect inflation through other channels. 54 confirming that the openness-inflation results are sample-specific, as argued by Terra (1998) and Bleaney (1999). Dincer and Eichengreen (2014) also control for openness (also measured by the sum of exports and imports to GDP) in GMM estimates of inflation. The coefficient is weakly significant or insignificant with negative sign. Lotfalipour et al. (2013) showed in a static panel that countries that are exposed to oil price shocks have a positive relationship between openness and inflation.
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- 52See Campillo and Miron (1997), Kwon et al. (2009), CalderoÌn and Schmidt-Hebbel (2010), Lin and Chu (2013), Alpanda and Honig (2014), Dincer and Eichengreen (2014).
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- 53See Lim and Papi (1997), Loungani and Swagel (2003), and Kamin and Klau (2003).
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- â (2020) A phillips curve for the euro area. International Finance.
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- A growing body of literature on the effects of IT on average inflation, inflation volatility, average economic growth, and its volatility has emerged. The evidence mostly concludes that IT is beneficial in terms of lowering inflation, its volatility and inflation expectations.35 However, Ball and Sheridan (2005) argued that IT makes no difference among industrial countries.
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- A related effect that can be assessed by past inflation rates is inflation inertia, according to which inflationary shocks may translate into higher inflation expectations through wage and price contracts, which in turn materialize in terms of higher actual inflation.53 Also, as Alpanda and Honig (2014) pointed out, lagged inflation may account for mean reversion as inflation targeting countries tend to start with higher inflation rates and thus are more likely to experience larger drops in their inflation rates. Omitting this variable would bias the estimate of the IT coefficient.
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- A second explanation for the ambiguity in empirical studies is that the literature does not distinguish appropriately between central bank independence and conservatism.31 According to Rogoff (1985), the inflation bias depends on the combination of both. If this is not taken properly into account, estimates may be distorted.
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- A third explanation is given by the lack of data. Earlier studies were based on pure cross-sections of countries. Crowe and Meade (2008) found a significant negative relationship between both legal and actual independence, the latter measured by the turnover rate of central bank governors,32 and inflation in a sample of 56 countries after exploiting the time dimension of the data. However, they were unable to identify a significant link in the pure cross-section of the data set. One reason for this result might be that exploiting the time dimension of the data may diminish possible omitted variable biases which were identified in a meta-regression analysis of previous studies by Klomp and de Haan (2010). Following Brumm (2002) and de Haan et al. (2003) on the panel data set provided by Crowe and Meade (2008), Posso and Tawadros (2013) also found evidence that higher independence is conducive to lower inflation.
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Abo-Zaid, S. and Tuzemen, D. (2012) Inflation targeting: A three-decade perspective. Journal of Policy Modeling, 34, 621â645.
- According to Cukierman et al. (1992), political instability induces the use of revenues from money creation (seigniorage). The model prediction was tested on cross-section data for 79 countries after controlling for other variables. The outcome was that political instability significantly contributed to explaining the fraction of government revenue derived from seignorage.
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- Against this background, attention has increasingly been paid to the role of fiscal policy in determining inflation. The main result of the seminal paper by Sargent and Wallace (1981) is that the effectiveness of monetary policy in controlling inflation depends critically on its coordination with fiscal policy. In their model, tighter monetary policy could lead to higher inflation under certain circumstances, even when the traditional relation between money and the price level holds. Given the limits on domestic and foreign borrowing, monetization is the residual form of deficit financing. With the demand for government bonds given and in the absence of changes in future fiscal policy, a part of government obligations has to be covered by seigniorage at some point in the future. In line with this argument, Friedman (1994) expressed the view that expansionary fiscal policy had generated inflation in the U.S. by encouraging overly expansionary monetary policy.
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- Aisen and Veiga (2005) showed on a data set covering around 100 countries from 1960 to 1999 that a higher degree of political 31See Berger et al. (2001), Hayo and Hefeker (2002).
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Aisen, A. and Veiga, F. J. (2005) Does political instability lead to higher inflation? A panel data analysis. International Monetary Fund.
Aizenman, J. (1992) Competitive externalities and the optimal seigniorage. Journal of Money, Credit and Banking, 24, 61â71.
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Aksoy, Y., Smith, R., Grasl, T. and Basso, H. (2015) Demographic structure and macroeconomic trends. Working Papers 1528, Banco de EspanÌa.
Alesina, A. and Summers, L. H. (1993) Central bank independence and macroeconomic performance: Some comparative evidence. Journal of Money, Credit and Banking, 25, 151â612.
Alesina, A., OÌzler, S., Roubini, N. and Swagel, P. (1996) Political instability and economic growth. Journal of Economic Growth, 1, 189â211.
Alfaro, L. (2005) Inflation, openness, and exchange-rate regimes: The quest for short-term commitment. Journal of Development Economics, 77, 229â249.
- Alpanda and Honig (2014) argued that not all emerging economies are the same and that IT may work better in some economies than in others. In particular, since central banks differ in their degree of independence, this may interact with an IT regime to produce different macroeconomic outcomes. Therefore, it is possible that when this distinction is not made, conclusive results for the effects of IT in a subset of countries are weakened by the inclusion of countries for which IT has no effect. When differentiating the impact of IT based on the degree of central bank independence, they find large effects in emerging economies with low independence of the central bank. This suggests that an independent central bank is not a prerequisite for countries to experience significant declines in inflation after the adoption of IT. One channel through which IT lowers inflation more in countries with low central bank independence is by reducing budget deficits.
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Alpanda, S. and Honig, A. (2014) The impact of central bank independence on the performance of inflation targeting regimes. Journal of International Money and Finance, 44, 118â135.
- An important observation is that inflation has become increasingly globally synchronized (Ha et al. (2019)). Recent research has highlighted a large and growing role of global factors in explaining movements in national inflation rates.
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- Bobeica et al. (2017) investigated the case of the euro area and in comparison to the U.S. and Germany. This allowed them to treat each economy individually, as opposed to papers investigating relationships in a panel framework, pooling together countries with very different demographic situations. Demographics is a slow-moving process, unlikely to influence inflation at business cycle frequency. For this reason, they focused on long-term relationships between the two variables by employing 49All other exogenous variables are highly significant with the expected signs. 56 a cointegration framework. Bobeica et al. (2017) found supporting evidence for a positive relationship between inflation and the growth of working-age population in total population. A diminishing growth rate of the working age population, which can occur due to a higher share of the elderly, comes hand in hand with fading inflationary pressures if the monetary policy does not react.
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CalderoÌn, C. and Schmidt-Hebbel, K. (2010) What drives inflation in the world? In Inflation in an Era of Relative Price ShocksâProceedings of a Conference held at the H.C. Coombs Centre for Financial Studies, Kirribilli on 17â18 August 2009 (eds. R. Fry, C. Jones and C. Kent), RBA Annual Conference Volume, chap. 8, 201â213. Canberra: Reserve Bank of Australia.
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- Castro et al. (2003) found that the extent of debt monetization in OECD countries is negatively associated with the degree of central bank independence. Kwon et al. (2009) applied a dynamic fixed-effect estimator and a fist-difference GMM estimator on data from 71 countries from 1962 to 2004 and show that debt growth leads to inflation in indebted developing countries, but less so in other developing countries. In advanced countries a growing debt is less inflationary.
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Castro, R., De RESENDE, C. and RUGE-MURCIA, F. (2003) The Backing of Government Debt and the Price Level. Cahiers de recherche 16-2003, Centre interuniversitaire de recherche en conomie quantitative, CIREQ. URL: https://ideas.repec.org/p/mtl/montec/16-2003.html.
- CataÌo and Terrones (2005) control for openness measured as the ratio of exports plus imports to GDP in their abovementioned study on deficits and inflation. The results are not only dependent on the estimation procedure, but also on the country group. Only for the advanced country group does openness yield a statistically significant negative coefficient, 46Lane (1997), however, emphasized a different channel through which openness and inflation may be related, namely the degree of imperfect competition and price rigidity in the non-traded sector.
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CataÌo, L. A. V. and Terrones, M. E. (2005) Fiscal deficits and inflation. Journal of Monetary Economics, 52, 529â554.
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Clark, T. E. and McCracken, M. W. (2006) The predictive content of the output gap for inflation: resolving in-sample and out-of-sample evidence. Journal of Money, Credit and Banking, 1127â 1148.
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- Emerging market countries, in particular, were searching for a nominal anchor that did not have the instability associated with fixed exchange rate regimes. By 2006 eight advanced economies and 13 emerging market countries had adopted it (Batini and Laxton (2007)). At the start of 2012, some 27 central banks were considered fully-fledged inflation targeters, and several others were in the process of establishing an IT regime (Hammond, 2012). ITâs perceived benefits include both lower inflation and inflation variability, while retaining enough flexibility to respond to macroeconomic shocks to stabilize output.
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- Ever since emerging economies started issuing debt in global markets, the currency composition of debt has become a central element of the policy debate. During the 1990s, the perception was that governments found it difficult to place debt denominated in local currency, a phenomenon Eichengreen et al. (2002) termed the original sin. The predominant concern was related to the economic vulnerabilities associated with high levels of debt-dollarization. Over the last decade, this has changed as governments from emerging countries have increasingly issued local currency debt. But this switch may come at a price. In the models by Calvo (1988) and Missale and Blanchard (1994), higher levels of privately held government debt with a longer maturity raise the incentive for a government to attempt surprise inflation. In this literature, foreign currency, inflation-indexed, or short-term debt are remedies against surprise inflation.
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- Feldkircher and Siklos (2019) investigated dynamics of inflation and short-run inflation expectations of professional forecasters in a global vector autoregressive (GVAR) model. The results indicate that inflation expectations increase in the short run if inflationary pressure stems from either domestic supply or demand shocks. However, the effects of the demand and supply shocks are short-lived for most countries. This result changes when global oil price inflation accelerates. In this case, a more pronounced and long-lasting long-run effect on inflation expectations is found for a range of countries. The 50See, among others, Bernanke et al. (2008), De Gregorio (2012), and Gospodinov and Ng (2013).
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Feldkircher, M. and Siklos, P. L. (2019) Global inflation dynamics and inflation expectations. International Review of Economics & Finance, 64, 217â241.
- Finally, the structure of debt also plays a role in the FTPL literature, where government debt not backed by expected future surpluses ensues in inflation, immediately or, depending on the maturity structure, in the future (Cochrane, 2001).
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- Fiscal Theory of the Price Level A similar reasoning lies behind the fiscal theory of the price level (FTPL). The FTPL identifies the wealth effect of government debt as an additional channel of fiscal influence on inflation. It posits that increased government debt adds to household wealth (defying Ricardian Equivalence) and, hence, to the demand for goods and services, ushering in price pressures.38 36See Batini and Laxton (2007), Mishkin and Schmidt-Hebbel (2007), Gonçalves and Salles (2008), Lin and Ye (2009), Abo-Zaid and Tuzemen (2012), Samarina et al. (2014), and Deniz et al. (2016).
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- Given the theoretical ambiguity, some empirical investigations have stepped in to shed light, but, not surprisingly, their conclusions are contradictory. Most of the studies have focused on Japan, as its transition from aging society to an aged society is the fastest in the world, but other advanced economies have also started to be in the limelight. Recent work, using survey data, suggests that inflation expectations rise with age, implying higher concern and, hence, risk aversion to inflation in a graying society (Blanchflower and MacCoille (2009)).
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He attributes the weakening of euro area inflation to a decline in expected inflation. Ball and Mazumder (2020) find that Friedmanâs half-century-old Phillips curve fits the behavior of core inflation in the euro area.
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- However, in criticizing the pure monetarist view, Kuttner (1990) noted that although some measure of money (possibly M2) may be the main determinant of inflation in the long run, it does not follow that only money matters in determining inflation over all horizons. In this vein a number of empirical studies show that the sources of inflation are quite diverse and include a countryâs institutional organization, the monetary policy strategy in place, fiscal imbalances, effects of globalization and technology, demographic changes, (shocks to) prices of natural resources, as well as past inflation. We will discuss them in turn and present a selection of empirical studies.
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- However, this link is practically completely due to the presence of high-inflation or hyperinflation countries. Recent studies, for instance, Hillinger et al. (2015), and Teles et al. (2016) confirmed the quantity theory of money in countries with low inflation. However, the long-run link between money growth and inflation has weakened in low inflation countries, especially after the Great Inflation period. Gallegati et al. (2019), in a wavelet-based exploratory analysis covering 16 developed countries and spanning 140 years, documented a close relationship between excess money growth and inflation over time horizons between 16 and 24 years.
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- In his empirical study on a cross-section of 114 countries based on 1973-88 averages, Romer (1993) found a robust negative relationship between openness, proxied by the ratio of imports to GDP, and inflation. More specifically, while Romer (1993) found that the basic correlation is robust to conditioning on other variables (development level of a country, CBI, and political stability) essentially no relationship between openness and inflation is reported for the most developed countries.
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- In short, empirical studies have encountered difficulties in uncovering a statistically significant and strong relationship between budget deficits and inflation. An important reason is the use of data samples with a disproportionately high weight on advanced countries or economies with historically low inflation (CataÌo and Terrones (2005)). Countries that have wellestablished institutions that curb fiscal profligacy, central banks that are credibly committed to low inflation, and deep financial markets arguably have great latitude in managing their intertemporal budget constraints (Canzoneri et al. (2001)).
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- In short, there are many ways in which increased openness can lead to a lower price level. However, as pointed out by Wynne and Kersting (2007), it is important to keep in mind that most of these are one-time effects, implying a transitory impact on inflation. Nevertheless, these one-time effects may take a long time to play out, so that the temporary effects may last quite a long time.
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- In the New Keynesian literature, there are four approaches establishing a link between past and current inflation. The first is the model by Gali and Gertler (1999) in which price reoptimization is done following a rule of thumb, the second is the indexation model proposed by Christiano et al. (2005), and the third is the sticky information model of Mankiw and Reis (2002) which distinguishes between reoptimizing agents with adaptive expectations and those relying on past inflation as a proxy for expected inflation.
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- One interpretation is that governments in poor countries might find it optimal to rely more heavily on seigniorage instead of output taxes to finance their expenditures. According to the Theory of Optimal Taxation, governments optimally equate the marginal cost of the inflation tax with that of output taxes.40 Edwards and Tabellini (1991) and Cukierman et al. (1992) failed to find evidence that this theory applies to developing countries. The empirical failure of the Theory of Optimal Taxation motivated the use of theoretical and empirical models focusing on the role played by political and institutional variables discussed above. Debt Management An important issue in the discussion about the possible implications of public debt is its structure.
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- One is the inaccuracy in measurements. Several of the indices that have been constructed to capture the degree of central bank independence rely on the wording of the law. This de jure measurement may be different from actual (de facto) independence, particularly in emerging and developing countries (Cukierman (1992)). Applying latent variable analysis to explicitly deal with measurement errors, Brumm (2002) concluded that the negative relation can be restored across countries.
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- One problem in estimating the effect of political instability on inflation is (potential) collinearity with other independent variables. More stable countries tend, for instance, to have a higher per capita output growth (Alesina et al. (1996)). Dincer and Eichengreen (2014) found that central bank independence and transparency respond to similar economic and institutional variables such as political stability. To tackle the resulting endogeneity problem, they use political stability as an instrument for transparency.
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Ottonello, P. and Perez, D. J. (2019) The currency composition of sovereign debt. American Economic Journal: Macroeconomics, 11, 174â208.
- Overall, the empirical literature documents beneficial effects from transparency. Sterne et al. (2002) used the survey data collected by Fry et al. (2000) to find a statistically significant, inverse relationship between average inflation and transparency across 82 countries after controlling for a number of other factors, including central bank independence. Crowe and Meade (2007) reported, in contrast, that while the relationship between transparency and average monthly inflation is inverse, it is not significant in their sample of 40 countries. Dincer and Eichengreen (2014) found that greater transparency is associated with lower average levels of inflation after controlling for openness, financial depth, and past inflation.
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- Since the seminal work of Kydland and Prescott (1977) and Barro and Gordon (1983), CBI is considered an institutional necessity for credible monetary policy geared toward price stability. This proposition has been widely analyzed with various independence measurements.28 However, the cross-country empirical evidence on the relationship between the degree of CBI and inflation is mixed, largely depending on the choice of sample countries. On the one hand, a robust and significant inverse relationship has been found.29 On the other hand, this result has been questioned.30 Recently, Dincer and Eichengreen (2014) provided a detailed analysis of the effect of CBI on inflation and its variability during the period from 1998 to 2010 based on annual indices for more than 100 central banks. They found some negative, albeit statistically inconsistent, association between CBI and inflation.
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- Some empirical studies including Anderson et al. (2014), Yoon et al. (2014), Gajewski (2015), and Bobeica et al. (2017) found empirical evidence for aging to be associated with deflationary pressures. In contrast, Juselius and TakaÌts (2015) documented that aging leads to more inflation. Similarly, Aksoy et al. (2015) estimated long-run effects of the changing age profile and found that dependent cohorts enhance the inflationary pressures in the long run.
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Sterne, G., Stasavage, D. and Chortareas, G. (2002) Does it pay to be transparent? International evidence from central bank forecasts. Federal Reserve Bank of St. Louis Review, 99â118. 42 Stock, J. H. and Watson, M. W. (2019) Slack and cyclically sensitive inflation. Tech. rep., National Bureau of Economic Research.
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- The change in the oil price has been used as a control variable in several empirical studies.51 CunÌado and PeÌrez de Gracia (2003) found evidence of cointegration in the oil price-inflation relation in 11 of 15 European countries between 1960 and 1999.
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- The cited studies used a cross-section specification. The alternative is to exploit the time-series structure of the data and use panel estimation methods.48 Alfaro (2005) reports an inflation increasing effect of openness in a panel of 148 countries.
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- The most prominent hypotheses on the link between population aging and inflation relate to the theories on life-cycle consumption and savings, secular stagnation, impact on financial wealth, and political economy, whose underlying channels reach contradictory conclusions on the impact of demographic developments on inflation (Bobeica et al. (2017)). Life-cycle theory According to the life-cycle theory, individuals smooth their consumption over a lifetime. As the savings rate tends to be lower when the share of young and old-age dependents in total population increase, a discrepancy between aggregate demand and supply arises, and props up inflation to equate at a steady state. The shrinking labor supply puts upward pressure on wages, further pushing up inflation. The bottom line is that aging is inflationary.
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- The negative relationship between fixed exchange rates and inflation is also reported in Cottarelli et al. (1998) and Husain et al. (2005). The reason seems to be a smaller money growth and a higher monetary credibility. Similarly, Bleaney (1999) found that floating exchange rates are significantly associated with inflation rates at least 10 percent a year higher than pegged exchange rate regimes in the post-Bretton Woods era to 1998.34 B.3.2 Inflation Targeting Inflation targeting (IT) is an operational framework for monetary policy aimed at achieving a numerical value (or range) for the inflation rate. A growing number of countries have adopted IT over the last two decades. Starting in the early 1990s with a handful of advanced economies, by the late 1990s and early 2000s, central banks in emerging economies began adopting IT.
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- The New Keynesian approach predicts that there should be a short-run Phillips Curve that relates some measure of economic activity to inflation.21 This approach posits that deviation of an economyâs actual output from its potential level as a result of excess demand in an overheated economy (positive output gap) engineers inflation. 22 Empirical support for 20Other authors, for example, Dincer and Eichengreen (2014), measured financial depth by the ratio of M2 to GDP.
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- The quantitative analysis of the model by Ottonello and Perez (2019) based on a panel of 18 countries shows that the presence of the trade-off between the hedging motive of local-currency nominal debt and its distortionary incentive motive, which gives rise to inflationary costs and real exchange rate distortions can indeed account for the observed degree of original sin in emerging economies, as well as its dynamic patterns.
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- The second line of thought associated with globalization and its effects on inflation, and holds that in a more integrated world, competition between currencies forces central banks to adopt best practices and keep inflation at bay. However, this disciplining effect is related to financial globalization, rather than real globalization (Wynne and Kersting (2007)).
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- The two main follow-up studies that look at the same period as Romer (1993), are Lane (1997) and Terra (1998).46 By conditioning on country size, per capita income, and central bank independence the relationship between openness and inflation becomes statistically significant and negative even for the advanced economies. However, the relationship can be lessened by controlling for development and indebtedness. Campillo and Miron (1997) used a slightly extended sample period (1973-94) of 62 countries and also conditioned on a wider set of variables (prior inflation experience, optimal tax considerations, and time-consistency issues in areas other than monetary policy). Their finding is that even for developed countries, greater openness is associated with significantly lower inflation.47 In this vein, Daniels et al. (2005) and Badinger (2009) reported a robustly negative effect of openness on inflation in a broad cross-section of countries (except for OECD countries).
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- This evidence notwithstanding, the literature has little to say about what conditions support the effect of independence on inflation. As pointed out by Hielscher and Markwardt (2012), while many studies include a range of control variables, there is very little analysis into the interaction between them. Hielscher and Markwardt (2012) showed in a cross-section of 69 countries that higher independence does not necessarily improve the inflation performance. What is crucial is not only a sufficiently large increase in independence, but also a high quality of political institutions. Recently, Baumann et al. (2021) accounted for possible reasons that motivate the decision of a country to adopt a certain degree of CBI and use a causal model that summarizes the economic process of inflation to inform their statistical analysis in which countries are treated as units in a panel setup. The authors report only a weak causal link from independence to inflation, if at all.
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- This result does not seem to be robust to the sample period. By using debt and inflation data that span the entire post-1960 period, specifically including the important inflation starts that occurred in the 1960s and early 1970, Boschen and Weise (2003) showed that the positive correlation between the average debt ratio and the average inflation is smaller and not statistically significant.
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- Tinbergen, J. (1930) Determination and interpretation of supply curves: an example. Zeitschrift fuÌr NationaloÌkonomie, 1, 669â679.
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- to output gap changes in the New Keynesian Phillips curve is opposite to those postulated by the New Classical approach. See Carlin and Soskice (2015).
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- To test this theory, it is necessary to estimate potential or trend output in order to define the gap between actual and potential output. Therefore, any test of the gap model is a joint test of the estimated gap and the impact of the gap on inflation. Unfortunately, estimating trend or potential output is more an art than a science. There are many different methods, and no one is trouble-free. Stock and Watson (2019) recently proposed as a measure of slack real activity variables that are bandpass filtered or year-over-year changes instead of gaps. B.2 Institutional variables The soundness of institutions in place is considered a prevention to the potentially numerous motives for authorities to inflate.27 The institutional organization of a country can be split in four separate itemsâcentral bank independence, central bank transparency, political stability, and economic growth.
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Truman, E. M. (2003) Inflation Targeting in the World Economy. Washington DC: Institute for International Economics.
- Using the GMM systems estimator as opposed to the commonly used difference-in-differences estimator employed in Ball and Sheridan (2005), Brito and Bystedt (2010) report weaker support for the effect of IT on average inflation, inflation volatility, and growth volatility, and provide evidence that average growth is lower under IT. Surveying the literature, Ball (2010) concluded that the evidence of beneficial effects of IT in emerging economies, while stronger than in advanced countries, is not yet conclusive.
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Vaida, F. and Blanchard, S. (2005) Conditional akaike information for mixed-effects models. Biometrika, 92, 351â370.
Vega, M. and Winkelried, D. (2005) Inflation targeting and inflation behavior: A successful story? International Journal of Central Banking, 1, 153â175.
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Wynne, M. A. and Kersting, E. K. (2007) Openness and inflation. Staff Paper 2, Federal Reserve Bank of Dallas.
Yoon, J.-W., Kim, J. and Lee, J. (2014) Impact of demographic changes on inflation and the macroeconomy. Working Paper 14/210, International Monetary Fund.